Retailers see web ads as new revenue source

Amazon.com and Walmart.com are increasingly acting like traditional media publishers by selling display advertising on their websites, and estimates put their resulting revenue in the hundreds of millions of dollars a year.

Now other online retailers are following suit in hopes of monetizing the eyeballs their content attracts — regardless of whether they make a product sale.

A couple of San Francisco companies are riding the trend and are at the forefront of what experts say could quickly become a multi-billion dollar market: Connecting advertisers with retailers, designing and selling ads, and then delivering them to consumers in a personalized and contextual manner.

One pioneer in the space is Longboard Media, a four-year-old, 35-person company that is already profitable and doing $10 million to $20 million in revenue, according to co-Founder and CEO Jim Barkow.

The other San Francisco firm is RichRelevance, which started in 2006 as a personalized product recommendation technology company and added advertising services for online retail sites in late 2010.

RichRelevance was co-founded by CEO David Selinger, former head of personalization R&D at Amazon, to give retailers the kind of recommendation engine that Amazon has used so effectively. It has received $57.8 million in venture capital and does not disclose revenue.

Before starting Longboard Media in 2008, Barkow and Engler worked at eBay, where Barkow was senior manager of strategic partnerships, and Engler was director of global ad sales.

The duo bootstrapped for the first several years, and though Longboard was profitable, they raised $5 million last September because business was growing faster than projected, Barkow said. They passed on an option for another million dollars, not seeing a need.

Barkow said retailers are quickly waking up to the fact that they are leaving virtually free money on the table by not advertising to the 225 million U.S. consumers that visit their websites — an audience larger than the 160-plus million U.S. citizens that are members of Facebook.

In addition, current estimates are that 85 percent of shoppers are doing online research before buying either online or offline, Barkow said.

EMarketer analyst Jeffrey Grau agreed, saying that advertising offers retailers a way to make money off that traffic, which only results in sales on their websites about three percent of the time.

“It makes a lot of sense because it’s very profitable,” Grau said.

Analysts say the trick will be finding enough advertisers and retailers with mutual interests. “The winning formula has yet to be determined,” said Forrester analyst Sucharita Mulpuru, who nevertheless estimated Amazon could be making close to $500 million from online advertising.

Longboard delivers ads from 135 brand advertisers on 37 shopping sites, and it also does retargeting on the open web — following shoppers with ads based on prior behavior on a retailer’s website — something RichRelevance does not do for fear of alienating consumers.

RichRelevance says its extensive personalization algorithms allow it to be more judicious about which ads get placed before which consumers, and the result is a higher conversion rate.

“Everybody wins when you respect the consumer,” said Andrew Zeiger, general manager of advertising at RichRelevance, who joined the company in January.

RichRelevance, which is also beefing up staff in advertising services, has been delivering advertising to retailers including Sears and Target from customers including Colgate, P&G, Verizon, Cisco and Toyota.

Barkow said Longboard’s business has grown most dramatically in the last six months, and he is hoping to double staff, particularly in sales and engineering, by early 2013. The trick in today’s competitive technology labor market is finding qualified people, he said. Longboard also has offices in Chicago, Dallas and New York.

Longboard’s other main competitors include two East Coast firms founded in 2004: Tampa-based Triad Retail Media, which represents Walmart, eBay, CVS and Home Depot, and New York City-based HookLogic, which represents Expedia, Hotels.com, Shoebuy.com and Staples.

Longboard Media’s three top retailer venues by volume are OfficeMax, Overstock.com and Newegg.com, which just signed on in April. Advertisers include Sony, Samsung, Maytag, Black & Decker and Microsoft.

ComScore analysts have taken notice of the increasing prevalence and quality of advertising on retailer websites, particularly on Amazon and Walmart, which have about 100 million and 50 million online visits a month, respectively, said Andrew Lipsman, a vice president at the digital measurement firm.

“We’ve been discussing this trend in recent months,” he said. ComScore is calling such advertising “digital endcaps,” referring to the sale of physical display spots at the end of aisles in physical retail stores.

Theoretically, such advertising should command a relative premium because viewers are in actual purchase mode, though pricing is currently about the same or a bit less as for other ads, according to recent comScore data. Lipsman speculated that the prices reflect the newness of the sector.

Retailers as a whole have not come quickly to the idea of selling advertising on their websites. A prevailing worry has been that ads will simply redirect hard-won traffic to another site.